After weeks of volatility driven by tension in the Middle East, crude oil prices have taken a sharp turn lower. Brent crude has slipped below the psychologically important $75-per-barrel mark and is now trading close to levels seen before the recent geopolitical flare-up. It has now fallen over 22% in the last 1 month.
Now, looking at it from the Indian perspective, the implications are fairly significant, given the country imports the major chunk of its crude oil requirements. As crude prices cool off, the attention has once again shifted to a group of crude-linked stocks that typically benefit when oil becomes cheaper.
Speaking on the sharp drop in crude prices, Axis Direct stated that “the decline was driven by progress in US-Iran peace negotiations, which improved the global supply outlook and eased concerns over potential supply disruptions.”
Let’s take a look at what investors need to know –
Oil marketing companies
The biggest beneficiaries of lower crude prices are India’s oil marketing companies.
Stocks such as Bharat Petroleum Corporation (BPCL), Hindustan Petroleum Corporation (HPCL) are attracting attention once again.
The reason is simple. When prices decline, the cost of crude oil falls immediately. However, retail fuel prices do not always adjust at the same pace. This often allows fuel retailers to earn stronger marketing margins.
Lower crude prices can also reduce working capital requirements for refiners because less cash is needed to purchase inventories.
Aviation sector
Another key sector that is sensitive to the crude price movement is aviation.
Aviation Turbine Fuel (ATF) typically accounts for a large portion of an airline’s operating expenses. When crude prices fall, airlines often benefit through lower fuel bills.
That puts InterGlobe Aviation, the operator of IndiGo, in focus. The share price of IndiGo is up over 4%.
Since fuel is one of the largest cost components for airlines, even a moderate decline in oil prices can improve profitability if passenger demand remains healthy.
Paint companies
The paint industry is another sector that closely tracks movements in crude oil prices.
Many key raw materials used in paint manufacturing, including solvents, resins and other chemical inputs, are linked to petroleum products. As a result, lower crude prices can reduce input costs.
Stocks such as Asian Paints and Berger Paints (India) are therefore likely to remain on investors radar.
Tyre makers
The tyre industry is another major consumer of crude-linked products.
Materials such as synthetic rubber, carbon black and nylon tyre cords are all derived from petrochemicals. A decline in crude prices generally reduces the cost of these inputs.
As a result, stocks such as MRF and Apollo Tyres have moved into focus.
Lower raw material expenses can provide relief to margins. This will be particularly for companies operating in a highly competitive industry.
Specialty chemical and plastic companies
The impact of cheaper crude also extends to specialty chemical and plastic manufacturers.
Companies that use polymers and petrochemical derivatives as key raw materials can benefit when input prices soften.
One stock investors are watching is Supreme Industries. The company manufactures plastic pipes, packaging products and other polymer-based solutions.
What investors need to watch next
While crude prices have eased sharply, markets will continue tracking developments in the Middle East, shipping activity through the Strait of Hormuz and progress in diplomatic discussions involving the United States and Iran.